Research


Blending spezialfonds and global listed real estate


This paper seeks to increase the understanding of the performance implications for investors who choose to combine an unlisted real estate portfolio (in this case German Spezialfonds) with a (global) listed real estate element. We call this a “blended” approach to real estate allocations. For the avoidance of doubt, in this paper we are dealing purely with real estate equity (listed and unlisted) allocations, and do not incorporate real estate debt (listed or unlisted) or direct property into the process.

A previous paper (Moss and Farrelly 2014) showed the benefits of the blended approach as it applied to UK Defined Contribution Pension Schemes. The catalyst for this paper has been the recent attention focused on German pension fund allocations, which have a relatively low (real estate) equity content, and a high bond content. We have used the MSCI Spezialfonds Index as a proxy for domestic German institutional real estate allocations, and the EPRA Global Developed Index as a proxy for a global listed real estate allocation. We also examine whether a rules-based trading strategy, in this case Trend Following, can improve the risk adjusted returns above those of a simple buy and hold strategy for our sample period 2004-2015.

Our findings are that by blending a 30% global listed portfolio with a 70% allocation (as opposed to a typical 100% weighting) to Spezialfonds, the real estate allocation returns increase from 2.88% p.a. to 5.42% p.a. Volatility increases, but only to 6.53%, but there is a noticeable impact on maximum drawdown which increases to 19.4%. By using a Trend Following strategy, raw returns are improved from 2.88% to 6.94% p.a., The Sharpe Ratio increases from 1.05 to 1.49 and the Maximum Drawdown ratio is now only 1.83% compared to 19.4% using a buy and hold strategy. Finally, adding this (9%) real estate allocation to a mixed-asset portfolio allocation typical for German pension funds there is an improvement in both the raw return (from 7.66% to 8.28%) and the Sharpe Ratio (from 0.91 to 0.98).